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So how is the economy?

Last week we talked about the challenges facing the new Egyptian government. We spoke of the newly appointed prime minister’s objectives. Mr Mehleb has proclaimed that his main aims are to wipe out militant violence and improve the economy. Well, security we all know about and can see its status by watching the news; but how …

Last week we talked about the challenges facing the new Egyptian government. We spoke of the newly appointed prime minister’s objectives. Mr Mehleb has proclaimed that his main aims are to wipe out militant violence and improve the economy. Well, security we all know about and can see its status by watching the news; but how is that economy that he is aiming to improve doing?

The facts:

At the time the previous government took charge, the situation was dire; growth rate was at 1.8% with deficit reaching 14% of GDP and reserves standing near $15bn. It did not take long before help came along in the form of $15bn in cash deposits, fuel sustenance and grants. Egypt had the Kingdom of Saudi Arabia, UAE and Kuwait to thank for this generosity.

The impact of this bailout package has enabled the country to navigate through very tumultuous times but the funding was hardly sufficient to change the reality; this reality showed inflation which has soared to close to 11%, unemployment rate that reached 13% and a total debt which ballooned over $260bn dollars, far exceeding the country’s GDP.

Now what Mr Mehleb is looking at is a budget deficit of nearly $35bn, and mounting pressures on governmental spending in areas such as fuel subsidies which cost alone more than half this figure. Other demons that he has to contend with are pressures for implementing minimum wage, and needs for upgrading infrastructure. He also needs to accomplish this against the backdrop of sluggish foreign direct investment and floundering tourism which has plummeted 30% as of December 2013.

The mistakes:

In May of last year we spoke here about reforms and choices that needed to be made as then President Morsi and cabinet members were globetrotting to pursue additional funding in an attempt to extend the reality for few more months instead of attempting meaningful reforms. Morsi understood well that any meaningful reforms will be considered back-pedaling on his grandiose promises of Egypt’s new found wealth.

Now the current government is starting to send signals that it may not walk in Morsi’s shoes. In a recent speech, Mehleb spoke of finite resources and warned of tough times ahead. The same sentiment was echoed by army chief field Marshall Abdel El Fattah Al Sisi. This indicates that the current leadership is beginning to realise that continuing to sail on borrowed money simply means that Egypt will be living on borrowed time.

The solutions:

The formula is simple; the current government will either have to curb spending or increase its funding sources. Theoretically, there is plenty to do on the spending side by dismantling the massive public sector and taking radical measures on subsidy reforms. The other alternatives are to increase taxes. With tax revenues representing 15 percent of the national income, there is certainly room to apply progressive taxation or even wealth tax as some pundits suggest.

All of these are tough choices as the economy doesn’t exist in isolation from the political situation; and with planned elections on the way, the government will feel the need to tread lightly when it comes to applying them.

With 7% growth rates, former president Mubarak did not feel the same pinch to act. However, current leadership is facing a monumental challenge to either act now or to continue living on life support – until someone decides to remove the plug.

Dr Mohamed A Fouad is a global expert on service quality as well as a political and social activist.